The Fed Blog

Tuesday, May 29, 2012

Energy Costs & Reshoring in the USA

No one is talking about “peak oil” anymore. Instead, the buzz is all about the technological revolution in the energy industry, which is dramatically boosting the proven reserves of oil and natural gas. The epicenter of this revolution is the United States. However, the new technologies are being introduced around the world in France, Poland, China, and other countries that might be suitable candidates. The plunge in the price of natural gas in the United States is likely to lead a global decline in energy costs. The price differential between crude oil and natural gas may be starting to decline after having spiked at a record high earlier this year.

Cheap natural gas prices at home and rapidly rising labor costs in China should boost US manufacturing. A new study by the Hackett Group found that US companies are exploring reshoring as an option for nearly 20% of their offshore manufacturing capacity between 2012 and 2014. “This repatriated capacity could roughly offset the jobs that will otherwise move offshore, indicating that the great migration of manufacturing offshore over the past several decades is stabilizing.” The Hackett Group's research found that the cost gap between the US and China has shrunk by nearly 50% over the past eight years, and is expected to stand at just 16% by 2013. This trend is largely driven by rising labor costs in China and falling energy costs in the US.

Last Thursday, Reutersreported: “Vast reserves of natural gas and oil unlocked from underground shale deposits have slashed the price of U.S. natural gas to a fraction of costs in Europe and Asia, making it some of the cheapest energy in the world. That is cutting production costs at U.S. factories, making 'Made in America' a more attractive option and driving investment in everything from foundries to chemical plants. The shale energy revolution could also turn the United States into a net exporter of many fuels in little more than a decade, transforming energy from the economy's Achilles' heel to a source of strength.”

If environmental concerns raised by new drilling techniques don’t lead to regulations that snuff out the boom, America will become a net energy exporter in just over a decade. Truck stops around the nation are adding tanks of LNG because it is substantially cheaper than diesel. Trucks transport roughly three-quarters of American freight, so lower transportation costs could provide a big boost to the economy. The resulting boom could add between a half percentage point and a full percentage point to annual real GDP growth over the next 10 to 15 years.

Today's Morning Briefing: One Nightmare & 12 Dreams. (1) The end is near, or maybe not. (2) Will Wisconsin vote make or break public unions? (3) What if Supremes overturn ObamaCare? (4) Fiscal cliff is only a 1.3% drop! (5) Simpson and Bowles pushing their plan again. (6) What if Greeks vote to stay? (7) What if Obama wins, or loses? (8) Unyielding Mullahs will yield. (9) Peak oil has peaked: Look out below! (10) Incomes rising in China. (11) Second recovery in US. (12) Dreaming about a new high for stocks. (13) Adding risk back into recommended portfolio during June. (14) “The Best Exotic Marigold Hotel” (+ + +). (More for subscribers.)

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.